Welcome to this week’s edition of Geopolitics & the Day After. Each week, we curate and synthesize key developments from global politics, economics, and financial markets, drawing from a wide range of trusted sources. Our goal is to provide you with a clear, concise, and insightful overview of the forces transforming the world today and shaping tomorrow. Below is an overview of what we cover this week:
Geopolitical Concerns examines how Iran is destabilizing internally toward potential civil conflict, U.S. global leadership is eroding under confrontational policies, and China is simultaneously purging its military leadership and losing momentum as a Middle East power.
Geoeconomics takes a look at political intervention risks in U.S. monetary policy, China’s worsening deflation cycle, and investor flight toward assets like carbon permits and gold, which reflect a global economy increasingly shaped by policy uncertainty, structural imbalances, and shifting market risk perceptions.
Global Junctions dives into rapid advances in AI, investor bets on research‑first “neolabs,” and geopolitical efforts to reduce strategic dependencies from Japan’s rare earths to Europe’s defense buildup.
Global Trajectories reviews how the global order is fracturing as U.S.–Europe relations deteriorate, China pushes the renminbi as a reserve currency, and Europe wavers on environmental commitments, while early signs of reform‑driven recovery emerge in Nigeria and South Africa.
Geopolitical Concerns
The violence in Iran could lead to civil war
Economist
How America First Risks Becoming America Alone
David Luhnow, Sune Engel Rasmussen and Bertrand Benoit, Wall Street Journal
Xi Jinping’s historic purge of China’s military: 5 things to know
Lorretta Chen, Cissy Zhou and Wataru Suzuki, Nikkei Asia
China’s Middle East Moment Is Stalling Out
Peter Martin and Sam Dagher, Bloomberg
Iran is entering a period of acute internal instability as the regime’s violent repression of recent protests has accelerated political radicalization and raised the specter of civil conflict. Mass casualties, widespread destruction, prolonged internet shutdowns, and intensified surveillance have deepened public anger rather than restoring deterrence, while economic deterioration has further eroded the regime’s traditional support base. As reformist channels close and compromise disappears, parts of the opposition are shifting from protest to open advocacy of armed resistance, drawing parallels with Syria and Libya despite the heavy costs such paths entailed elsewhere. External pressure, including the visible buildup of U.S. military power, adds to the volatility. Yet, foreign intervention risks compounding chaos rather than resolving it, as both regime elites and opponents appear prepared for a prolonged and potentially violent confrontation over the future of the state itself. At the same time, the credibility of U.S. global leadership is weakening under an increasingly confrontational and transactional foreign policy that has strained alliances across Europe, the Americas, and parts of Asia. Cuts to foreign aid, withdrawal from multilateral frameworks, hostile rhetoric toward allies, and uncertainty around security guarantees have fueled sharp declines in favorable perceptions of the United States, prompting partners to hedge economically, rearm militarily, and explore alternative alignments. While American soft power and institutional resilience have historically enabled recoveries from reputational damage, the depth and duration of current distrust risk creating lasting erosion of the postwar alliance system that underpinned decades of relative stability.
China, meanwhile, is grappling with significant internal turbulence within its own military establishment as a sweeping purge of senior People’s Liberation Army leadership underscores the intensity of power consolidation under President Xi Jinping. The removal of top generals has left the Central Military Commission hollowed out, heightened distrust within the officer corps, and created short-term command uncertainty. While the upheaval likely reduces the immediate risk of major military escalation, it also reflects a longer-term effort to forge a more disciplined, loyal, and centralized force. In the near term, Beijing is expected to rely on demonstrations of pressure below the threshold of war, even as structural modernization continues and political vetting reshapes the military hierarchy ahead of future leadership transitions. At the regional level, China’s momentum as a geopolitical broker in the Middle East has stalled, revealing the limits of an influence model built primarily on economic engagement and diplomatic symbolism rather than sustained security involvement. Despite deep trade ties and landmark moments such as the Saudi-Iran rapprochement, Beijing has largely remained peripheral during the Gaza war, Red Sea disruptions, and direct U.S.-Israeli strikes on Iran, while Washington has reasserted itself as the indispensable crisis manager. Economic constraints, risk aversion, and a reluctance to commit political or military capital have curtailed China’s ambitions, even as its commercial footprint continues to expand.
Geoeconomics
Trump Picks Kevin Warsh as Next Fed Chair
By Colby Smith, Tony Romm, and Ben Casselman, The New York Times
The Deflation Doom Loop Trapping China’s Economy
Hannah Miao, Wall Street Journal
Hedge funds pile into EU carbon permits ahead of supply squeeze
Elettra Ardissino, Financial Times
What is driving gold’s relentless rally?
Economist
Why software stocks are getting pummelled
Economist
President Trump’s nomination of Kevin Warsh as the next chair of the Federal Reserve has reignited concerns over the independence of U.S. monetary policy at a delicate macroeconomic juncture. While Warsh is an experienced former Fed governor, his recent shift toward advocating for lower interest rates has raised questions about whether policy decisions could be shaped by political pressure rather than economic fundamentals. A contentious Senate confirmation process now looms, as lawmakers and markets weigh the risk that sustained White House influence could undermine the Fed’s credibility at a time when inflation remains sticky, growth is moderating, and financial stability depends heavily on institutional trust. China, by contrast, is confronting a deepening deflationary cycle driven by overproduction, weak domestic demand, and structural incentives that favor investment over consumption. Despite steady headline growth supported by exports and technological advances, falling prices, shrinking corporate profits, and subdued wages are reinforcing household caution and high savings, trapping the economy in a self-reinforcing slowdown. This imbalance is spilling outward through record trade surpluses, intensifying global trade frictions as Chinese firms push excess supply abroad. Efforts to curb price wars and stimulate consumption have so far addressed symptoms rather than root causes, leaving policymakers struggling to reconcile industrial self-reliance with sustainable demand-led growth.
Financial markets are responding to heightened macroeconomic and political uncertainty with sharp reallocations. In Europe, hedge funds have amassed record-long positions in EU carbon allowances in anticipation of a tightening supply regime from 2026 onward, driving prices sharply higher and increasing cost pressures on energy-intensive industries. At the same time, gold has surged to record highs as investors seek diversification and protection amid fiscal stress, geopolitical risk, and doubts about policy orthodoxy. Meanwhile, equity markets have punished software stocks on fears that artificial intelligence will disrupt incumbent business models, though much of the weakness reflects cyclical slowdown rather than structural displacement.
Global Junctions
Dario Amodei — The Adolescence of Technology
Dario Amodei
These Billion-Dollar AI Startups Have No Products, No Revenue and Eager Investors
Kate Clark, Wall Street Journal
Inside Japan’s long battle to ‘de-Chinafy’ its rare earth supply chain
Shotaro Tani and Yuichi Shiga, Nikkei Asia
Europe’s $1 Trillion Race to Build Back Its Defense Industry
Alistair MacDonald and Cristina Gallardo, Wall Street Journal
Advances in artificial intelligence are increasingly framed as a civilizational inflection point, with growing recognition that the challenge lies not only in what AI can do, but in whether societies are prepared to govern it responsibly. As AI systems approach levels of autonomy and cognitive breadth that could rival or exceed human capabilities, concerns are crystallizing around systemic risks like loss of control, misuse by malicious actors, authoritarian exploitation, and large-scale economic disruption. The argument emerging from leading AI developers is not one of inevitability or technological fatalism, but of urgency calling for pragmatic safeguards, transparency, and narrowly tailored regulation to manage uncertainty without stifling innovation. Meanwhile, the AI boom is also reshaping capital allocation and the structure of innovation itself. Investors are increasingly backing “neolabs” (research-first AI startups with no immediate products or revenues) on the belief that future breakthroughs will come from small, elite teams pursuing foundational advances rather than near-term commercialization. This shift is drawing talent out of academia and intensifying competition among firms, raising questions about sustainability, concentration of expertise, and whether today’s funding dynamics are laying the groundwork for durable progress or speculative excess.
Parallel to these technological shifts, states are reassessing strategic dependencies in an era of heightened geopolitical risk. Japan’s long-running effort to reduce reliance on China for rare earths shows how industrial policy, diversification, and technological substitution can mitigate vulnerability without fully decoupling. Through stockpiling, overseas investments, recycling, and rare–earth–free innovation, Japan has materially lowered exposure, though at higher cost and with limits that illustrate how difficult full independence remains. Europe faces a similar reckoning in defense, accelerating efforts to rebuild domestic arms production as doubts grow over long-term U.S. security guarantees. Massive increases in spending and output are narrowing gaps in areas such as ammunition, drones, and armored vehicles, yet fragmentation, capability shortfalls, and reliance on U.S. systems persist.
Global Trajectories
Is this the end of the Western-led world order?
Hiroyuki Akita, Nikkei Asia
Xi Jinping calls for China’s renminbi to attain global reserve currency status
Financial Times
Environment: Europe’s temptation to unravel hard-won progress, ignoring scientific truth
Le Monde
Africa’s two biggest economies may be turning the corner
Economist
The widening rift between the United States and Europe is reshaping the global order, undermining the Western-led system that has anchored international politics since 1945. Under President Trump’s second term, disputes over Greenland, security burdens, and values have pushed transatlantic relations from partnership toward semi-adversarial coexistence, weakening trust and strategic alignment. This divergence benefits Russia and China, particularly in Asia, where allies such as Japan, South Korea, and Australia have relied on close NATO coordination to counter Beijing and Moscow. As Washington prioritizes China over Russia and signals openness to a ceasefire in Ukraine, Europe is accelerating its push for strategic autonomy, while Asia faces the risk that fractures within the West could embolden revisionist powers and destabilize the Indo-Pacific. Against this backdrop of fragmentation, China is pressing its long-term ambition to elevate the renminbi into a global reserve currency, seeking to position it as a strategic counterweight to the dollar in a more multipolar monetary system. While structural barriers continue to constrain rapid progress, Beijing is steadily laying institutional and financial groundwork. As confidence in the dollar’s dominance shows signs of erosion amid geopolitical and policy uncertainty, China is signaling a gradual, patient push to expand the renminbi’s role in trade, investment, and reserves rather than displace existing currencies outright.
At the same time, Europe’s internal trajectory reveals growing tension between political pressures and long-standing commitments to science-led environmental policy. While European leaders continue to contrast their stance with U.S. climate skepticism, recent legislative and regulatory backsliding risks diluting hard-won environmental progress. These developments show a broader challenge consisting of maintaining credibility on climate action while managing social and political backlash, particularly as far-right movements gain ground and exploit fatigue with green policies. In contrast, parts of Africa may be entering a more hopeful phase. Signs of reform-driven stabilization in Nigeria and South Africa through monetary discipline, energy-sector reform, subsidy removal, and exchange-rate liberalization are raising expectations that the continent’s two largest economies could once again act as engines of growth. If sustained, their recovery could lift regional performance and allow African growth to outpace Asia’s in 2026. Yet the outlook remains fragile, with deep structural reforms unfinished and political risks looming ahead of pivotal elections.
